The pandemic has wreaked havoc on family livelihoods, business fortunes, and global economies for the past two years. Caught in the middle was America’s higher education system. Seemingly overnight, vibrant college campuses turned into ghost towns. With colleges and students left scrambling, the government took unprecedented steps to prop up both sides.
The CARES Act included two major efforts aimed at supporting colleges and student loan borrowers. First was the Higher Education Emergency Relief Fund (HEERF), which distributed nearly $75 billion to colleges, helping schools cover pandemic-related costs and providing direct aid to students. Second was the pause on payments and interest on federal student loans. These measures eased the financial burden for millions of students and families.
However, with HEERF funding set to expire in 2022 and federal student loan payments scheduled to resume after May 1, this year will look much different. With college costs likely to jump in response to overall pressures, fair-value student lending solutions represent a significant opportunity for credit unions to serve members and grow high-yielding loan assets.
Return To A New Normal
Although things might not have been normal, many students returned to college campuses in fall 2021, and private student loan originations rebounded from 2020 as families secured much-needed funding. According to Measure One’s most recent Private Student Loan Report, originations increased nearly 6% year-over-year. For credit unions working with Student Choice, loan originations for new undergraduate borrowers jumped nearly 28% in 2021 from a year earlier.
Despite increasing originations and pandemic-induced economic challenges, loan performance for private student loans continues to be exceptionally strong and stable. Per Measure One:
- The late-stage delinquency rate (90 days or more past due) for undergraduate and graduate loans is 0.94% of loans in repayment. This is nearly 52% lower compared to five years ago and near historic lows.
- Annualized gross charge-off rate is 1.35% of loans in repayment, more than 30% lower compared to five years ago and also near historic lows.
Credit unions partnered with Student Choice have experienced similar numbers, with undergraduate private student loan 90-day delinquency rates of less than 1.3% and annualized charge-off rates at less than 0.85%. To maintain strong portfolio performance moving forward, it’s imperative that credit unions stay committed to sensible, disciplined underwriting criteria that includes:
- Risk-based pricing with minimum credit score requirements and criteria that strongly encourage a co-borrower.
- School certification to verify enrollment, validate loan amount, and determine fund disbursement.
- Restricting loans to students who are attending traditional four-year schools with a proven history of low student loan defaults.
- Lending directly to students and families within an existing field of membership to establish an opportunity for productive, long-term relationships.
This type of underwriting has allowed credit unions to consistently achieve strong portfolio performance over the past 14 years. In addition to stable repayment trends, credit unions, on average, have been able to recognize a very sustainable return (~3% ROA) that is on par or better than many other asset classes.
Reboot Refinance
Because of federal student loan payment relief resulting from the CARES Act, the student loan refinance market has been in a holding pattern for nearly two years. While private student loan borrowers have continued to leverage historically low rates to refinance their private student loans, many borrowers with federal student loans have held off, not wanting to give up their federal benefits. However, this could be about to change.
After several extensions by both the Trump and Biden administrations, the most recent of which came in late December, the federal student loan payment pause is now set to expire May 1, 2022. While questions linger, the White House and the U.S. Dept. of Education have confirmed multiple times that student loan payments will restart as planned. Assuming this occurs, it’s safe to assume student loan refinance will boom.
With rates at historic lows, savvy borrowers will act quickly to refinance and consolidate their student loan debt. To capitalize in this highly competitive space, credit unions must focus on several areas:
- Providing refi-specific tools and resources, including personalized assistance, to help borrowers make good decisions and understand their options.
- Sharpening the pencil on both variable and fixed-rate options, with repayment terms extending to 15 years.
- Consistent, highly targeted marketing efforts to compete with high-profile banks and fin techs.
Build Relationships
By offering both in-school loans and student loan refinance, credit unions can appeal to members at multiple stages of life college student, college graduate/young professional, and parent and establish a genuine opportunity for long-term relationships.
According to research conducted by Filene, members with a credit union private student loan (PSL) are highly productive. In fact, those age 31-37 with a PSL have a 5% higher credit card penetration and are almost twice as likely to have a mortgage at the credit union than those without.
To foster and grow these relationships, credit unions must commit to offering thoughtful tools and resources pertinent to member needs. Credit unions partnered with Student Choice have the ability to assist members via enhanced solutions, including:
- An online resource hub, with relevant and timely information ranging from college planning during the pandemic to advice on negotiating with a college for more financial aid.
- A College Counselor who can provide personalized support via e-mail or phone.
- Access to award-winning financial literacy, money management, and student lending resources.
- Platform integration with core and/or online banking systems to ensure members enjoy a seamless experience with the credit union front and center.
Ultimately, credit union lenders have an excellent opportunity in the education finance loan space. By offering thoughtful, targeted solutions that balance member needs with program sustainability, credit unions can empower the next generation of members and build meaningful relationships in the process.
Since our founding in 2008, Student Choice has partnered with more than 300 credit unions and assisted nearly 110,000 families with their higher education funding needs. To view downloadable case studies and sign up for one of our upcoming informational webinars, click here.
